Urban Policy Brief, Number 2
August 1995
HOMEOWNERSHIP AND ITS BENEFITS
At the request of President Clinton, the U.S. Department of Housing
and Urban Development (HUD) is working with dozens of national
leaders in government and the housing industry to implement the
National Homeownership Strategy, an unprecedented public-private
partnership to increase homeownership to a record-high level over the
next 6 years. The ideal of homeownership is so integral a part of the
American Dream that its value for individuals, for families, for
communities, and for society is scarcely questioned. This paper
provides a brief survey of research into the nature and significance of
homeownership's presumed benefits, particularly for lower income
households and other underserved populations.
Introduction
The desire for homeownership is deeply rooted in the American psyche.
Owning a home embodies the promise of individual autonomy and of
material and spiritual well-being that many people sought in coming to
this country. In addition to its functional importance and economic
value, homeownership has traditionally conveyed social status and
political standing. It is even thought to pro-mote thrift, stability,
neighborliness, and other individual and civic virtues.
Throughout this century, there has been bipartisan support for Federal
policies designed to encourage home-ownership. Herbert Hoover called
the owner-occupied home "a more wholesome, healthful, and happy
atmo-sphere in which to raise children." Lyndon Johnson promoted
homeownership as part of a strategy for addressing the urban ills of the
1960s, declaring that "owning a home can increase responsibility and
stake out a man's place in his community....The man who owns a home
has something to be proud of and reason to protect and preserve it."
Ronald Reagan said that homeownership "supplies stability and
rootedness."
President Bill Clinton has linked increasing homeowner-ship to the
challenge of expanding opportunity for work-ing families. Speaking to
the National Association of Realtors in November 1994, he expressed a
national consensus that "more Americans should own their own
homes, for reasons that are economic and tangible, and reasons that are
emotional and intangible, but go to the heart of what it means to
harbor, to nourish, to expand the American Dream."
However, the American Dream became more distant for many during
the 1980s, as the national homeownership rate fell from its historic high
of 65.6 percent in 1980 to only 64.1 percent in 1991. The decline has
been sharp-est among segments of the population for whom access to
the homebuying market has traditionally been most difficult. The
homeownership rate for very low-income families with children fell by
almost one-third, from 39 percent to 27 percent, between 1980 and
1991. Even among moderate-income households, homeowner-ship
dropped by 10 percent. Homeownership rates stagnated at
approximately 43 percent for blacks, whilehomeownership among
Hispanics fell from 43 percent in 1980 to 39 percent in 1991.
Perhaps most alarming has been the decline in home-ownership among
families under age 35, when most first-time homebuying occurs and the
preference for ownership is strongest. In 1980 almost 45 percent of
families in this age cohort owned a home; by 1991, the percentage
stood at less than 38 percent.
To reverse this trend, President Clinton directed HUD Secretary Henry
G. Cisneros to work with leaders in the housing industry,
representatives of nonprofit groups, and officials at all levels of
government to develop a National Homeownership Strategy that would
increase ownership opportunities among populations and commu-nities
with lower than average homeownership rates.
This unprecedented public-private partnership is founded on a deeply
rooted and almost universally held belief that homeownership provides
important advantages that merit continued public support. The National
Homeown-ership Strategy cites four fundamental benefits:
"Through homeownership, a family...invests in an
asset that can grow in value and...generate financial
security."
"Homeownership enables people to have greater
control and exercise more responsibility over their
living environment."
"Homeownership helps stabilize neighborhoods and
strengthen communities."
"Homeownership helps generate jobs and stimulate
economic growth."
The validity of some of these assertions is so widely accepted that
economists and social scientists have seldom tested them. However, the
nature and signifi-cance of homeownership's actual benefits particularly
for lower income, minority, and younger families has profound
implications for national housing policies and programs. The following
pages will briefly review evi-dence on the four premises that undergird
the National Homeownership Strategy.
Homeownership and Wealth Accumulation
Purchasing a home is the largest investment that most families will ever
make. Homeownership has been called a "forced savings plan" in that
an owner-occupant's payments on mortgage principal are retained as
equity in a comparatively illiquid asset. Wealth is accumulated to
the extent that the constant-dollar value of the owner's equity exceeds
any decline in the home's value.
But accrued equity is only one potential financial benefit of
homeownership. Buying a home with a mortgage is a leveraged
investment: even though only a small part of the purchase price is paid
as a downpayment, the buyer controls all appreciation in the value of
the property and absorbs any loss in value as well. General trend data
on housing prices confirm that owner-occupied homes have
performed well as long-term investments. Real prices for the
median-priced home increased by a total of 41 percent between 1960
and 1989. Even the lowest-priced houses increased in value by almost
30 percent.
However, many external factors can affect whether and at what rate a
home's value increases or decreases. Changes in interest rates influence
demand for housing and its attractiveness relative to other investments.
Regional economic downturns, such as the oil "bust" in the Southwest
during the mid-1980s, can severely de-press housing prices. The
dynamics of a particular hous-ing market or the fortunes of a particular
neighborhood can also be a strong determinant of local home values.
Nonetheless, homeownership has become a critical factor in moving up
the economic ladder. Home equity is the largest single source of
household wealth for most Americans. Median net wealth for
homeowners exceeds $78,400, while renters accumulate less than
$2,300, or3 percent of this amount. For homeowners, almost 60
percent of their wealth is in the form of home equity. For minority
homeowners, home equity is an even more important component of
wealth, representing more than three-fourths of their median net wealth
of approxi-mately $48,300, almost 100 times the median wealth of the
average black renter (barely $500). For owners in the lowest income
brackets as well, equity in single-family homes constitutes more than
half their wealth.
Homeowners also enjoy important tax advantages. The value and
distribution of Federal tax preferences for homeownership, such as the
deductibility of property taxes and mortgage interest and the one-time
exclusion of capital gains, are currently a matter of contentious
debate. It is estimated that three-fourths of the $100 billion foregone in
Federal tax revenues in 1994 due to these preferences will benefit the
wealthiest 20 percent of all households. However, some economists
reply that the comparative benefit would show a tilt toward less affluent
owners if these calculations included the ad-vantage that
owner-occupants enjoy over landlords by not being taxed on the return
on investment they receive by essentially renting to themselves.
Thus the economic evidence is clear in affirming that homeownership is
a good investment that increases wealth for families of all races and
incomes. However, critics of homeownership point out that the
economic benefits of homeownership for lower income and minor-ity
families should also be balanced against its financial risks. The lower
average incomes and educational attainment of these groups make them
particular vulner-able to economic downturns that can result in job loss
and, eventually, foreclosure. Indeed, newly published research on
FHA-insured mortgages indicate that default risk is higher among black
and lower income borrowers, although the explanation for this finding
is far from clear.
Additional Readings:
Gyourko, Joseph, and Peter Linneman. "Affordability of
the American Dream" in Journal of Housing Research 4
(1993): 39-72.
Hughes, James W. "Clashing Demographics: Homeownership and
Affordability Dilemmas" in Housing Policy
Debate 2 (1991): 1217-50.
Joint Center for Housing Studies. State of the Nation's
Housing 1992-94. Cambridge: Harvard University,
1992-94.
Ling, David C., and Gary A. McGill. "Measuring the Size
and Distributional Effects of Homeownership Tax
Preferences" in Journal of Housing Research 3 (1992):
273-303.
Stegman, Michael A. More Housing, More Fairly: Report
of the Twentieth Century Fund Task Force on Affordable
Housing. New York: Twentieth Century Fund Press,
1991.
Homeownership and Personal Well-being
Homeownership is thought to be an important element in achieving
personal fulfillment. When asked to define the good life, polls have
shown that many Americans value owning a home over such factors as
an automobile, a happy marriage, an interesting or high-paying job, and
good health. Homeownership is credited with increasing:
SELF-ESTEEM. Homeownership, as a commonly recognized symbol
of social status in the United States and other countries, could influence
one or more aspects of self-esteem reflected appraisal (the impact of
homeowning on the esteem in which one is held by others), social
comparison (homeownership as a measure of one's status and success
relative to others), and self-attribu-tion (ownership as an indicator of
personal success). But because homeowners are more likely to possess
other attributes positively correlated with high self-esteem such as
higher incomes, occupational status, and education isolating the
importance of homeownership can be difficult. Research on the
determinants of self-esteem has not been designed to make this
distinction.
CONTROL. It is often argued that homeownership enhances the
homeowner's sense of control over her life and environment by offering
greater privacy and protection against involuntary displacement.
However, critics such as Achtenberg and Marcuse counter that
low-income homeowners are less likely to benefit in these ways
because lack of wealth makes them more vulnerable to displacement
and less able to escape deteriorating neighborhoods.
LIFE SATISFACTION. Because owning a home is a widely shared
and cherished goal indeed, an expectation of most Americans, many
scholars have reasoned that its attainment would tend to increase the
homeowner's overall contentment with life. Although a number of
researchers have investigated the effects of housing on life satisfaction,
their work has focused on housing quality rather than tenure.
Despite the rhetorical attention given to these issues, there is very little
empirical evidence regarding the pre-sumed psychological benefits of
homeownership, partic-ularly for lower income families. However, one
small survey of low-income renters and first-time homebuyers
in Baltimore does attempt to measure these benefits directly. Rohe and
Stegman discovered that the low-income homeowners in their survey
showed significantly higher levels of life satisfaction than similarly
situated renters. While their survey uncovered little evidence that
homeownership measurably influenced self-esteem or perceived
control, large majorities of the respondents agreed, when asked
directly, that owning a home had made them feel better about
themselves and heightened their feeling of control.
Another topic that researchers are only beginning to explore is whether
children benefit as well from living in an owner-occupied home.
Various reasons for a corre-lation have been asserted, from
environmental differ-ences to the more developed life skills of
homeowners. Others have speculated that unmeasured personality
attributes that make some adults more likely to become homeowners
also enable them to raise children more successfully. Recently
published research by Green and White finds that children of
homeowners are significantly less likely than children of renters to drop
out of school, to have children while a teenager, or to be arrested
before age 18. The differences were largest among low-income
households. However, as with the other research discussed in this
section, it is difficult to show a direct causal relationship between
homeownership and behav-ioral patterns.
Additional Readings:
Achtenberg, Emily Paradise and Peter Marcuse. "The
Causes of the Housing Problem" in Rachel G. Bratt, et
al., Critical Perspectives on Housing. Philadelphia:
Temple University Press, 1986.
Choko, Marc H. "Homeownership: From Dream to Materiality" in
R. Allen Hays (ed.). Ownership, Control, and the
Future of Housing Policy. Greenwich, CT: Greenwood,
1993.
Green, Richard K. and Michelle J. White. Measuring the
Benefits of Homeowning: Effects on Children. Chicago:
Center for the Study of the Economy and the State,
1994.
Kemeny, Jim. "A Critique of Homeownership" in Rachel
G. Bratt, et al., Critical Perspectives on Housing. Philadelphia: Temple
Univ. Press, 1986.
Rohe, William M. and Michael A. Stegman. "The Effects
of Homeownership on the Self-Esteem, Perceived
Control, and Life Satisfaction of Low-Income People" in
Journal of the American Planning Association 60 (1994):
173-84.
Homeownership and Neighborhood Stability
One of the most persistent claims made for homeownership is that
owners have a greater economic and emotional stake in their
community and thus are more likely than renters to act in ways that
maintain and strengthen that community. While there is a rich
sociological literature on the social and political life of communities, it
concentrates on the importance of factors such as age, sex, income,
presence of children, and residents' atti-tudes about their neighbors and
neighborhood. However, several studies have considered the possible
correlation between tenure choice and:
LENGTH OF RESIDENCE. In a seemingly direct sense,
neigh-borhood stability means that residents are less likely to move
away. Homebuying is frequently viewed as signi-fying a family's
commitment to remain in the commu-nity. Numerous studies have
consistently shown that homeowners are less likely to move than
renters, and that neighborhoods of owner-occupants have lower
residential turnover, even after accounting for life cycle factors and
housing characteristics. However, as Rohe and Stewart point out,
factors such as lower incomes, which are also associated with length of
residence among homeowners, "may have mitigating effects on
overall neighborhood health, especially in the long run."
NEIGHBORING. It is thought that homeowners, unlike more
transient renters, will more readily forge the informal social and mutual
support relationships that foster close-knit, nurturing communities. In
fact, several studies have found evidence that homeownership is
positively asso-ciated with higher levels of neighboring. Overall,
however, research on this topic has yielded decidedly mixed results,
with some scholars finding no significant differ-ences in neighboring
behaviors and at least one study of three British towns showing that
renters actually had more friends in their neighborhood. However, none
of these studies can establish whether homeownership in itself causes
changes in neighboring.
UPKEEP. Advocates frequently explain their support for
homeownership programs by asserting that such efforts promote
improved neighborhood housing conditions and enhanced home values:
owner-occupants are more likely than absentee landlords or their
tenants to maintain and improve their properties. Research conducted
by Galster affirms this belief. After controlling for a series of structural,
household, and neighborhood characteristics, owner-occupants spent
more on maintenance, were less likely to defer repairs, and reported
fewer housing prob-lems. The contrast in maintenance efforts was
"especially strong when comparing low-income households,"
suggesting that increasing ownership among such families could have a
marked effect on neighborhood housing conditions.
CRIME PREVENTION. Beginning with Jane Jacobs, both scholarly
and popular commentators have observed that the dynamics of stable
neighborhoods seem to deter crime strangers are recognizable and
residents, by the everyday acts of watching and using their
surroundings, discourage illicit activity. Architect Oscar Newman has
postulated that physical design features which assert this territoriality
by demarcating and allocating space as semi-private can make the area
more "defensible." Under this theory, neighborhoods of detached
homes, where outside space is identified with a single family, are
inherently safer than high-rise apartment blocks. Substantial research
confirms that neighborhoods of single-family homes in good repair both
traits associated with owner-occupancy, albeit imperfectly (particularly
among lower income families) tend to experience less crime, although
the precise reasons for this phenomenon are still unclear.
SOCIAL POLITICAL ACTIVISM. Another reason offered for the
greater safety of predominantly owner-occupied neighborhoods is that
stakeholders are more willing to commit time and resources to
organizations and activities that promote social cohesion or address
local problems. In fact, data have consistently shown that
homeownership is associated with social and political participation,
although tenure is less important than other attributes characteristic of
homeowners, who tend to be older and have higher levels of income
and education.
According to a 1986 nationwide survey by the National Association of
Realtors , homeowners were more likely than comparable renters to
volunteer time to community and religious organizations, to attend
public hearings and to vote in national elections, to join community
improve-ment groups, and to participate in voluntary organizations.
Rohe and Stegman's longitudinal study of low-income, first-time
homebuyers found that homebuying increased a household's activity in
neighbhorhood and block associations, but in the short term had little
effect on participation in school, church, social, and political
organizations beyond their immediate environment. Such results have
generally been found to hold equally true whether the owner is
motivated by a desire to protect their property's investment value or by
some less tangible reason.
Additional Readings:
Baum, Terry C. and Paul William Kingston. "Homeownership and
Social Attachment" in Sociological Perspectives
27 (1984): 159 80.
Chambers, Daniel N. and Mary B. Schwartz. Owner-Renter Differences
in Political and Social Involvement, Housing Maintenance, and Savings
Choices. Washington, DC: National Association of Realtors , 1989.
Cisneros, Henry G. Defensible Space: Deterring Crime
and Building Community. Washington, DC: HUD, 1995.
Galster, George C. Homeownership and Neighborhood
Reinvestment. Durham, NC: Duke Univ. Press, 1987.
Jacobs, Jane. Death and Life of the Great American
City. New York: Random House, 1961.
Newman, Oscar. Defensible Space. New York:
Macmillan, 1972.
Rohe, William M. and Michael A. Stegman. "The Impact
of Homeownership on the Social and Political Involvement of
Low-Income People" in Urban Affairs Quarterly
30 (1994): 28-50.
Rohe, William M. and Leslie Stewart. "Homeownership
and Neighborhood Stability." Work in progress submitted
to HUD, April 1995.
Saunders, Peter. A Nation of Home Owners. London:
Unwin Hyman, 1990.
Homeownership and Economic Growth
Perhaps the greatest macroeconomic benefit of home-ownership is seen
in the millions of jobs it creates for American workers. Building 1,000
single-family homes creates almost 2,100 full-time jobs. Almost half of
these jobs are in onsite construction work; another 20 percent
involve employment in transportation, trade, and other locally based
services. Still more employment is created through the resulting
increase in demand for household goods and services. Approximately 3
million workers are employed in residential construction, and industries
that provide construction inputs employ another 3 million.
Because housing production has such strong "multiplier" effects,
construction activity is credited with the power to jump-start other
sectors of the economy.
Given its vast size and labor-intensive nature, it is hardly surprising that
housing market activity is closely watch-ed as a barometer of the
Nation's economic health and as a harbinger of future trends. Total
annual investment in residential property ($282 billion in 1994) is over
4 percent of the entire U.S. gross domestic product (GDP). Investment
in housing is estimated to account for at least one-third of the change in
GDP as the national economy moves into or out of recession.
This investment in housing fuels an immensely powerful engine of
economic activity. The use of the Nation's housing stock (rent and
mortgage payments and related expenditures) represents more than 9
percent of GDP and 14 percent of personal consumption. Another
12 percent of personal consumption expenditures go toward household
operations (including furniture, appliances, utilities, and maintenance).
The emergence of a strong secondary market for home mortgages has
dramatically expanded investor partici-pation in the housing market.
Twenty years ago, banks and thrifts retained up to three-quarters of
residential mortgages in their portfolios. However, since the late
1980s, Fannie Mae and Freddie Mac have purchased more than half of
all newly-originated home mortgages. Most of these mortgages are
pooled as mortgage-backed securities and sold in the secondary
market, where they are purchased by mutual funds, pension funds, and
a wide range of other institutional investors. These in-vestors were
holding $1.5 trillion in mortgage-backed securities at the end of 1993,
or nearly half of all residential mortgage debt.
Additional Readings:
Diamond, Douglas B. and Michael J. Lea. Sustainable
Financing for Housing: A Contribution to Habitat II.
Working paper. Washington, D.C.: Fannie Mae Office of
Housing Research, 1995.
Dubin, Elliott. "Direct Fiscal Impacts of Residential Construction" in
Housing Economics (May 1994): 11 14.
The Future of Home Building. Washington, DC: National
Association of Home Builders, forthcoming.
"Homeownership Past, Present, and Future" in U.S.
Housing Market Conditions (August 1994): 2 5.
"Patterns of Homeownership" in U.S. Housing Market
Conditions (November 1994): 2 7.
U.S. Bureau of the Census. Residential Finance. 1990
Census of Housing, CH 4 1. Washington, D.C.: U.S.
Government Printing Office, 1994.
The National Homeownership Strategy
For over 60 years, the Federal Government has played an important
role in making the American Dream of homeownership a reality for
millions of families. It created the Federal Housing Administration
(FHA) and Government-sponsored enterprises such as Fannie Mae
to enhance the availability and affordability of home mortgage funds.
HUD and other Federal agencies have provided billions of dollars in
grants and loans to support affordable home construction and
rehabilitation and to aid low- and moderate-income families in buying
their first home. Incentives for homeownership have been
written into the Nation's tax code.
However, Federal institutions, policies, and programs alone cannot
meet President Clinton's goal of record-high levels of homeownership
within the next 6 years. Under the leadership of Secretary Cisneros,
HUD has forged a nationwide partnership that will draw on the
resources and creativity of lenders, builders, real estate profession-als,
community-based nonprofit organizations, consumer groups, State and
local governments and housing finance agencies, and many others in a
cooperative, multifaceted campaign to create ownership opportunities
and reduce the barriers facing underserved populations and
communities. The National Homeownership Strategy is committed to:
CUTTING HOUSING PRODUCTION COSTS. Although the high cost of building
and rehabilitating housing is a nationwide dilemma, the National
Homeownership Strategy recog-nizes that the specific causes and thus
many of the solutions vary significantly among local and regional
markets. Accordingly, the National Partners have en-dorsed a wide
range of complementary strategies to:
Reduce regulatory barriers that can significantly increase the cost of
producing and rehabilitating affordable housing, including
high-quality manufactured housing.
Encourage the production of modest "starter homes"
that would be affordable to first-time homebuyers.
Stimulate the development of new building technol-ogies, materials,
and processes that could make homes more efficient to produce and
operate.
MAKING FINANCING MORE AVAILABLE, AFFORDABLE, and FLEXIBLE. The
inability (either real or perceived) of many younger families to qualify
for a mortgage is widely recognized as a very serious barrier to
homeownership. The National Homeownership Strategy commits both
government and the mortgage industry to a number of initiatives
designed to:
Cut transaction costs through streamlined regulations and
technological and procedural efficiences.
Reduce downpayment requirements and interest costs by making
terms more flexible, providing subsidies to low- and
moderate-income families, and creating incentives to save for
homeownership.
Increase the availability of alternative financing products in housing
markets throughout the country.
TARGETING ASSISTANCE TO UNDERSERVED COMMUNITIES. Decline and
disinvestment have left many pockets of urban and rural America
without the mortgage capital, infrastructure, and economic opportunity
needed to make homeownership feasible for current residents and
attractive to prospective ones. The National Homeown-ership Strategy
urges government, employers, lenders, insurers, and nonprofits to
undertake strategies that will:
Build the capacity of local actors to foster affordable
homeownership in their own communities.
Promote homeownership opportunities in areas easily accessible to
employment.
Revitalize distressed urban neighborhoods so that they can attract
and retain homeowners.
Expand homeownership in rural America through initiatives that
recognize the unique challenges and resources of nonmetropolitan
areas.
OPENING THE HOMEBUYING MARKET TO UNDERSERVED POPULATIONS.
Discrimination, inflexibility, and lack of informa-tion continue to keep
homeownership out of reach for many Americans, including racial and
ethnic minorities, people with disabilities, and others. The National
Homeownership Strategy acknowledges a special need and presents a
special opportunity to reach out to histori-cally underserved
populations through actions that:
Promote fair housing and fair lending by removing barriers that
deter many Americans from seeking buying, insuring, or maintaining
a home in the neighborhood of their choice.
Increase employment diversity in the homeownership industry.
RAISING AWARENESS OF HOMEOWNERSHIP OPPORTUNITIES. Although
moderate interest rates and steady housing values have raised the
National Association of Realtors Housing Affordability Index to its
highest level in 20 years, many particularly younger families no longer
believe that the American Dream is within their reach. The National
Homeownership Strategy calls for a coordinated nationwide campaign
to promote the accessibility of homeownership and emphasize its
"importance...as a national value."
EXPANDING HOMEOWNERSHIP EDUCATION AND COUNSELING. A little help
can make a big difference for first-time home-buyers struggling to cope
with the challenges of finding and buying a home, as well as with the
ongoing respon-sibilities of ownership. Lower income households in
particular may lack important information about housing opportunities
and financing options, or may need to develop their household
budgeting and maintenance skills. The National Homeownership
Strategy calls for creating "a new paradigm" that would "make
counseling an integral component of the services made available at
the local level to potential homebuyers." The Strategy proposes
research, capacity-building, information-sharing, and other actions
intended to:
Improve the quality, effectiveness, and availability of pre- and
post-purchase counseling and education services.
Develop a dependable source of long-term funding for nonprofit
homeownership counseling agencies.
Foster greater coordination at the local level between real estate
brokers, lenders, and local providers of homeownership counseling
and education services.
Conclusion
The United States has much at stake in the success of the National
Homeownership Strategy. Although research on some key points
remains inconclusive, the preponderance of the existing scholarship
confirms the validity of many of the benefits popularly attributed to
homeownership. Homeownership is a key source of individual wealth
and national prosperity. Overall, home-owners seem to be more content
with their own lives and more likely to participate in the life of their
neighborhood.
In some respects, the advantages of homeownership are greatest for the
households who currently have the least access to them. Minorities
derive a greater share of per-sonal wealth from homeownership than
whites. Home-ownership seems to make a particularly significant
difference in the physical condition of low-income neighborhoods and,
perhaps, in the lives of low-income children as well. By improving
access to homeownership for those previously underserved, the
National Home-ownership Strategy can, as Secretary Cisneros has
predicted, "make a real difference in the lives of millions of American
families, and in our communities, for years to come."